Feb 15. All inflation, all the time
Stocks continue to float higher on a sea of liquidity, with light volume. Grains pulled back a bit although copper had a new high closing settlement. There’s a lot of news out: China inflation +4.9%, Obama’s budget ($3.73T) with a huge projected deficit, continued demonstrations in middle eastern nations, and a reminder of european issues with problems at West LB.
–The overriding theme seems to be inflation concerns, which are now constantly in the press, and food costs in particular. (Clothing prices expected to rise 10% due to cotton). Are long treasury rates going to dramatically respond to budget deficits and inflation? So far Japan hasn’t had a crisis, and in fact is slightly upgrading its outlook. Will companies benefit from increased pricing power? FedEx, which just lowered its guidance due to weather challenges and fuel costs, is an example of potential problems. Keeping funding costs at zero (for TBTF banks), actually seems to be adding to risk at this point. In fact there is a story out about adjustable rate mortgages again gaining favor due to the steep yield curve.
–Despite what I perceive to be growing risks, implied vol in interest rates was crushed yesterday. For example midcurve Dec straddle went from 101 to 96.
–Today’s news includes Retail Sales expected +0.5%. TIC data as well.
